While I'm no fan of Rand, I think 'rule' here is meant as control and coerce, not normal beneficial government stuff. Viewed in that light, the quote makes sens

While I'm no fan of Rand, I think 'rule' here is meant as control and coerce, not normal beneficial government stuff. Viewed in that light, the quote makes sense - you can't get someone to inform on their friends by offering a mere tax break. But if you threaten them with jail time for some 'crime', they'll be much more cooperative.